Group-4- Report - monetary policy in response to effects of covid-19 in vietnam PDF

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FOREIGN TRADE UNIVERSITYINSTITUTE OF ECONOMICS AND INTERNATIONAL BUSINESS***MONEY AND BANKING ESSAYMONETARY POLICY IN RESPONSE TO EFFECTS OF COVID-19 INVIETNAMClass: TCHE303(GD2-HK1-2021).Instructor: MS. Fin. Tran Thi Minh TramImplementation group: Group 4Ha Noi, December 2021Members of group 4Full ...

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 FOREIGN TRADE UNIVERSITY INSTITUTE OF  ECONOMICS AND INTERNATIONAL  BUSINESS ____***____

MONEY  AND BANKING ESSAY  

MONETARY  POLICY  IN RESPONSE TO EFFECTS OF  COVID-19 IN VIETNAM

Class: TCHE303(GD2-HK1-2021).1 Instructor: MS. Fin. Tran Thi Minh Tram Implementation group: Group 4

Ha Noi, December 2021

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Members of group 4

Evaluation

Full name

Task done

Thái Diệu Đan (Leader)

Suggest topic, outline; Write content of 1.5, 2.1, and 4.1.

100

Vũ Mạnh Tuấn

Suggest topic; Write content of 1.4, 3.2; Do formatting.

100

Nguyễn Thị Thu Hằng

Suggest outline; Write content of 1.2, 4.3; Prepare PowerPoint.

100

Lê Ngọc Ly

Write content of Intro, 3.2; Presenting.

100

Nguyễn Linh Khanh

Write content of Intro, 3.1; Presenting.

100

Nguyễn Nhật Linh

Write content of 1.3, 5.2; Presenting.

100

Vũ Hạnh Nguyên

Write content of 1.1; 4.3; Prepare PowerPoint.

100

Table of content 

Introduction

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Chapter 1: The theoretical basis of monetary policy

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1.1 Definition of monetary policy

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1.2 Position in the economy

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1.3 Goals of monetary policy

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1.4 Types of monetary policy

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1.4.1 Tight monetary policy

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1.4.2. Expansionary monetary policy

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1.5 Tools

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1.5.1 Reserve Requirements

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1.5.2

Open Market Operations

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1.5.3

The Discount Rate

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Chapter 2: The impact of Covid-19 on Vietnam's economy

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2.1 The background of the Covid-19 pandemic in Vietnam.

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2.2 The impact of the Covid-19 epidemic on the overall economy.

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2.2.1 Macro indicators

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2.2.1.1 GDP

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2.2.1.2 Inflation

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2.2.2 Government budget 2.2.2.1 Government budget revenue

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2.2.2.2 Government budget expenditure 2.2.3 Enterprises and employees

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Chapter 3: Current status of monetary policy in Vietnam in responding to the impact of the Covid-19 epidemic. 25 3.1 Overview of Monetary policy in Vietnam in the period of 2020-2021

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3.1.1 Interest rate policy

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3.1.2 Debt term restructure, loan interest exemption policy

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3.1.3 Credit support policy from banking industry

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3.2 Current status of applying monetary policy tools in Vietnam

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3.3 The effectiveness of monetary policy in Vietnam during the Covid-19 pandemic.

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3.3.1. Overall results

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3.3.2. Effectiveness of Interest Rate Policy

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3.3.3. Effectiveness of Debt term restructure, loan interest exemption / reduction to support enterprises policy

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3.3.4. Effectiveness of Credit support policy from banking industry

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Chapter 4: Policy recommendations in the “new normal”.

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4.1 Policy orientation.

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4.2 Short-term solution.

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4.3 Long-term solution.

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4.3.1 Solution for monetary policy

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4.3.1.1 Solutions to help perfect monetary policy tools

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4.3.1.2 Loosen the fluctuation band of exchange rate

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4.3.1.3 The State Bank closely monitors economic developments and coordinates with the Ministry of Finance from information provision and exchange, planning to policy implementation.

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4.3.1.4 Enhancing the independence of the Central Bank 4.3.1.5 The State considers, researches towards testing and issuing Central Bank Digital Currency 4.3.2 Solution for the whole economy. References

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List of tables Figure 1 Total number of cases of COVID-19 in Vietnam

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Figure 2 Quarterly GDP growth rate

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Figure 3 The development of inflation and core inflation in economy

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Figure 4 Summary the Government budget revenue

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Figure 5 Summary the Government budget expenditure

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Figure 6 Situation of the impact of COVID19 to the performance of businesses

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Figure 7 Number of employees in 2020 compared to 2019

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Figure 10 Vietnam GDP growth

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Figure 11 Vietnamese Dong (VND) per US dollar (USD)

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Figure 12 Inflation rate

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Introduction Money and Banking is a course on the economics of money, banking and financial markets. The direction aims to grant the students a preface to the function of money, financial markets, financial institutions and monetary policy in the economy, therefore supplying a stable basis for further study or employment in the monetary offerings industry. As economics students, we understand the importance of studying and researching Money and Banking. The Money and Banking course will look at some crucial issues in the idea and exercise of monetary policy and how it influences the world. Monetary policy is a central bank's actions and communications that manipulate the money supply. It increases liquidity to produce profitable growth as well as reduces liquidity to prevent inflation. The COVID-19 pandemic has spread fleetly across the world since December 2019. As of 26 October 2020, greater than 43.5 million COVID-19 confirmed cases have been reported, with nearly 1.2 million associated deaths. Furthermore, according to WHO, Likewise, the number of verified cases is still increasing in numerous countries. Despite COVID-19, Vietnam’s economy has remained flexible, increasing by 2.9 percent in 2020, which was one of the top growth rates in the world, and growth is projected to be 6.5 percent in 2021, thanks to robust profitable fundamentals, decisive containment measures and well-targeted authorities support, with accordance to the IMF’s latest annual evaluation of the country’s economy. Using thorough disease surveillance data, this paper gives an overview of the unfolding of the COVID-19 pandemic in Vietnam and estimates the effectiveness of the Vietnamese reaction to contain the pandemic. Therefore, our group has come to a decision of choosing this topic for our report:  “Monetary policy in response to the effects of Covid-19 in Vietnam”.

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During the process of making this report, due to the limited amount of time as well as some certain limits in understanding and data collecting, the report may hardly avoid mistakes. We are looking forward to your comments for the betterment of our group’s performance. Through this report, we sincerely appreciate and value the insights and guidance that MS. Fin. Tran Thi Minh Tram provided us.

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Chapter 1: The theoretical basis of monetary policy

1.1 Definition of monetary policy Monetary policy is a set of actions that can be undertaken by a nation's central bank to control the overall supply of money that is available to the nation's banks, its consumers, and its businesses and achieve sustainable economic growth. 1.2 Position in the economy In the system of macroeconomic policies of the State, monetary policy is one of the most important because it directly affects the field of monetary circulation. From the 1980s onwards, monetary policy has become more prominent because: first, there is a view that fiscal policy is based on D. Ricardo's theory of comparative advantage is inefficient; second, monetary policy can maintain a stable and minimal gap between actual and potential output levels; Third, in developed countries, there is a trend towards stabilization and a gradual decrease in the amount of government lending, while in developing countries, restrictions on foreign loans have reduced the possibility of government implementing anti-crisis fiscal policy; fourth, time lag in the practice of formulating and implementing fiscal policy in cyclical conditions the economic recession has become shorter and shorter, making the solutions of fiscal policy unable to take effect in a timely manner; Finally, fiscal policy is increasingly influenced by the interests of political forces more than monetary policy. Moreover, in periods of economic growth, people still tend to have a prudent fiscal policy, even in the medium term, developing economies still prefer to use a system of self-adjusting tools without accepting unusual solutions. Not outside the general trend of the world, in Vietnam in recent years, monetary policy has been used as the main tool to adjust macroeconomics. This can be clearly seen in the monetary policy management process of the SBV. But it also has a close relationship with other macroeconomic policies such as fiscal policy, income policy, foreign economic policy… For the SBV, the planning and implementation of

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Monetary policy is the most basic activity, all of its activities are aimed at making national monetary policy more effective. 1.3 Goals of monetary policy According to D.C. Rowan “The monetary policy is defined as discretionary action undertaken by the authorities designed to influence the supply of money, cost of money or rate of interest and the availability of money.” There have been multiple objectives of monetary policy varied in different nations, in different periods of time and in different economic contexts. However, different aims conflict with one another, making it difficult to choose the ultimate goal for a country's monetary strategy. The appropriate monetary policy objective should be chosen by the monetary authority in light of the economy's specific conditions and requirements. Despite significant background differences, the majority of countries considers 6 main goals of monetary policies, which include: -

Price Stability

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High Employment

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Economic Growth

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Interest Rate Stability

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Financial Stability

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Exchange Stability By implementing feasible monetary policies, the governments wield the power

to attain their end goals of success and prosperity. In this part, we will give a breakdown of each goal before shedding light on the conflicts among those aims.

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Price Stability Reasonable price stability is deemed the most fundamental goal which can be achieved by utilizing monetary policy. To define, price stability is when the general level of prices in the economy avoid significant fluctuations, meaning they don’t rise or fall drastically in indexes of prices like the Consumer Price Index or the Harmonised Index of Consumer Prices. It is much needed to be maintained in order to lower and stabilize inflation. The key explanation in favor of this sentiment is that inflation brings about uncertainty that possibly curb the growth of the economy and make the planning procedure harder to be carried out. Additionally, social fabric is also affected by this phenomenon. Therefore, high inflation rate should be eschewed in order to avoid unwanted dire repercussions. In developing countries, the surge of investment activities comes in parallel with the dwindle in agriculture production which results in enormous pressure on prices. The significantly high inflation in India has gone to show the importance of monetary policy in such an alarming scenario has contributed to the short-run stability of money. However, inflation to some certain degree is unavoidable due to several changes in the developing economy’s structure like India. In fact, mild inflation or an increase in prices is required in order to incentivize producers and investors. According to P.A. Samuelson, inflation at a negligible rate of 3 to 4 percent can lubricate the wheels of trade and industry and boosts economic innovation. Price stability is additionally critical for a country's balance of payments to improve. Considering the opinion of C. Rangarajan, the increasing openness of the economy, the requirement to service external debt and therefore the necessity to boost the share of our exports in an exceedingly highly competitive external environment require that the domestic index number isn't allowed to rise unduly.

High Employment

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The highest level of employment or lowest level of unemployment that the economy can tolerate while maintaining a stable inflation rate is known as high employment. Experience over the last few decades has proven that it is possible to keep unemployment low and the labor market strong without causing inflation to rise unnecessarily. The jobs market, for example, proved extremely adaptive during the economic growth following the Great Recession, as unemployment fell below predictions of what was assumed to be sustainable. This provided numerous benefits and chances to families and communities who had been left behind far too frequently. In addition, in the absence of other hazards, a low level of unemployment will not be cause for concern.

Economic Growth Recent years, economic growth has garnered a great deal of attention from economists and statesmen on a global stage. Prof. Meier defined “Economic growth as the process whereby the real per capita income of a country increases over a long period of time.” Therefore, monetary policy encourages long-term economic growth by preserving a balance between total money demand and total production capacity, as well as fostering favorable conditions for saving and investment. Flexible monetary policy is the best way to bring demand and supply into balance. Monetary policy can also encourage faster economic growth by making borrowing more affordable and accessible. Short-term loans to satisfy working capital needs and long-term credit to meet fixed capital needs are both required in industry and agriculture. Commercial banks and development banks can meet the need for these two forms of credit. Easy access to credit at low rates of interest encourages

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investment or rises in society’s production capacity. As a result, the economy might grow at a quicker rate than before.

Interest Rate Stability The exchange-rate system is also a key component of monetary policy in an 'open economy,' or one with open borders for commodities, services, and financial movements. Under the current floating exchange rate regime, the central bank must take appropriate monetary measures to prevent excessive depreciation or appreciation of the rupee in terms of the US dollar and other foreign currencies.

Financial Market Stability The financial market is seen as a source of capital for the development of the economy. It contributes significantly to the control of capital from a location of excess to a place of scarcity, hence improving the efficiency of capital usage in the economy. The financial market's stability is critical to the economy of the countries because of this role. The central bank, with its ability to influence credit volumes and interest rates, is responsible for bringing stability to financial markets.

Exchange Stability The traditional goal of monetary authorities has been to maintain exchange stability. This was the primary goal of the Gold Standard across various countries. When there was an imbalance in the country's balance of payments, it was automatically adjusted by movements. "Expand currency and credit when gold comes in; contract currency and credit when gold leaves," as the saying goes. The disequilibrium in the balance of payments will be corrected, and exchange stability will be maintained.

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It should be emphasized that if exchange rates are unstable, gold will be outflowed or inflowed, resulting in an adverse balance of payments. As a result, stable currency rates are critical in international trade. By and large, it is evident that the primary goal of monetary policy is to ensure stability in the country's external balance. In other words, they should aim to eliminate the negative forces that cause exchange rate instability.

Conflicts among goals The first two aims, namely price stability and economic growth, do not conflict in the long run. Price stability, in reality, is a technique of achieving quicker economic growth. "It is price stability that provides the necessary atmosphere in which growth may occur and social justice can be ensured," writes C. Rangarajan. However, there is a trade-off between price stability and economic growth in the short run. Increased loan availability at a lower rate of interest leads to faster economic growth. This entails an expansion of the money supply. Nevertheless, an increase in the money supply and, as a result, a rise in consumer demand usually results in a high rate of inflation. This begs the question of what is the lowest acceptable rate of inflation that does not stifle economic growth. The question has yet to be answered. There is also a tension between economic growth and exchange rate stability. For instance, if a currency depreciates against another one, the central bank of that nation will have to tighten its monetary screws, raising interest rates and reducing bank excess liquidity (from which loans are made). In order to foster greater economic growth, the central bank must cut interest rates and increase credit availability to encourage private investment. As a result, that bank finds itself in a dilemma. To conclude, all goals of monetary policy are important and have their own merits and drawbacks. However, there is no goal that is undesirable or should be

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abandoned. Governments should set those that are compatible with each other to successfully achieve their goals.

1.4 Types of monetary policy Monetary policy has two types of expansionary monetary policy and tightening monetary policy. Depending on the performance of the economy and the macroeconomic goals that have been set in each socio-economic development period, the central bank can implement one of these two policies,

1.4.1 Tight monetary policy

Implementing tight monetary policy, the central bank acts to reduce the money supply in the economy, causing interest rates on the market to increase. Thereby, it narrows aggregate demand, causing the general price level to fall. To implement this policy, the central bank uses measures to reduce the money supply by: selling on the stock market, increasing the reserve requirement, or increasing the discount rate, and severely controlling the money supply. with credit activities... Usually, tight monetary policy is applied when the economy has too high a growth rate, that economy is in the state of "overheating", causing inflation and risk of explosion.

1.4.2. Expansionary monetary policy In essence, the central bank expands the money supply in the economy, causing interest rates to fall, thereby increasing aggregate demand, thereby expanding the size of the economy, increasing income and unemployment rate. reduction industry. To expand the money supply, implement an expansionary monetary policy, the central bank can do one of three ways: buy in the stock market, lower the reserve requirement

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ratio, and lower the reserve requirement. discount rate, or do both or three ways at the same time. E...